Thursday, February 12, 2009

Morning Stimulus Thought: Payroll Taxes

I know I have advocated a cut in the payroll tax for stimulus, as have many others, but this morning I was thinking about a reason it might be very counterproductive over the long-run.

As the Tax Foundation likes to point out, an enormous number of people already pay no federal income taxes at all.

Here we have significant portion of the population that vote for public provision of goods and services with no skin in the game. In fact, part of the reason they are asking for it is likely because they do not share in the cost.

So the question is, what will cutting the payroll tax do to the demand for more public provision over the long-run? Unless there is a complexity in the income tax code that I am not aware of, my thinking is that we would be further removing payers from the system, which might be a hidden cost we want to carefully consider before cutting the payroll tax.

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